A recent piece in Forbes offers 4 suggestions for beating inflation. After noting that “the present 0% rate [of inflation] blends an upward march of 2% in the cost of services with a collapse in the price of oil,” the article observes that “if commodities rebound over several years, 4% inflation could surface.”
To protect against this risk, the article explores 4 options:
- Treasury Inflation-Protected Securities (TIPS): These offer real protection for the principal invested, but a very low rate of return. Funds that roll over maturing bonds offer more liquidity, but do not provide the same guaranteed protection.
- Gold: Drawing on research by Gregory King of Rex Shares, the article notes adding 10% gold to a 60/40 stock/bond mix would have reduced volatility by 0.7% while shaving 0.2% off the return. Thus, gold is seen as “a probable but not certain cushion against double-digit inflation,” which might be combined with TIPS.
- Resource Stocks: Investing in natural resource producers may offer long-term protection, despite short-term volatility, because the price of resources are projected to climb due to increasing challenges in securing such resources and near-certain future demand.
- “Real Return” Funds: These funds seek to provide a “real return” measured against the Consumer Price Index (CPI) measure of inflation, often by trading in CPI swaps, and “they offer the prospect of doing better than TIPS in some markets.”
In an article in Canada’s Financial Post, columnist David Pett offers up some valuable investment insights from James Paulson, chief investment strategist at Wells Capital Management, who has been mostly correct in his stock market and economic calls since early in the bull market. Paulson explains that often, investors weight the consensus opinion in the market too heavily and lose sight about the factors that end up influencing what happens in the future. Paulson recently wrote, “combined, indisputable consensus trends and unrecognized themes can represent potential shocks to the investor mindset”. In Paulson’s view, there are five indisputable consensus themes and three unrecognized themes that investors should be mindful of.
Indisputable Consensus Themes
- The strong US Dollar: Most think the US dollar will remain strong, but the unforeseen fall of the greenback could cause US product demand and wage increases, and cause the Fed to increase rates faster than many expect.
- Low inflation: Inflation expectations remain low but the chances for at least moderate inflation are higher today than they have been in the past.
- The momentum trade: As momentum stocks continue to advance, more investors seek exposure to the group. This could be an issue for investors once leadership in the market changes.
- Buybacks: While the investment community has rewarded companies that have been buying back stock, those buybacks may decrease as growth picks up over the next few years.
- Mergers and acquisitions: M&A activity looks high relative to overall economic output, but firms may start to find other more productive uses of cash going forward, particularly given the current levels of stocks.
- Aging earnings cycle: The recovery is currently in its seventh year, making it one of the longer recoveries in US history. As a result, the market may experience more volatility going forward.
- Investor sentiment and valuation: The combination of the market’s valuation and investors’ bullish sentiment is high.
- An overvalued bond market at full employment: Most think that increasing yields will not negatively impact the equity markets in a material way. The article points out that “what is underappreciated is not just that yields are at very low levels, but that U.S. yields will soon rise from levels significantly below historical norms in an economy nearing full employment.”
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